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The Breakfast Briefing

All of a sudden, everyone cares about the fiscal cliff.

Stock futures fell sharply overnight amid word that House Republicans scuttled a vote on a backup plan late Thursday that would’ve at least partially averted the steep tax increases and spending cuts set to go into effect next year. Futures trading Friday morning suggests a weak opening for U.S. stocks. European markets slumped Friday in morning trading; the FTSE-100 was off nearly 1%, and the German and French bourses were each off about 0.5%. Yields tightened on the safe-haven German bund.

U.S. Lawmakers are now set to go home for the Christmas holiday without a concrete plan that addresses the cliff, a scenario many investors were hoping to avoid.

“The House did not take up the tax measure [Thursday] because it did not have sufficient support from our members to pass,” House Speaker John Boehner said in a statement Thursday night.

In a separate statement, the White House countered that President Barack Obama will still pursue a deal that prioritizes extending current tax rates for households making under $250,000 a year.

Dow futures plummeted more than 200 points late Thursday, and bond prices jumped as the news unfolded. Friday morning, about four hours before the U.S. market open, Dow futures were off 170 points and S&P futures were down 19. Both represent about a 1.3% decline. European government bonds and the euro were largely stable.

“This now brings my odds for going over the fiscal cliff from 75% to 90%,” Andrew Brenner, global head of international fixed income at National Alliance Securities, said in an email late Thursday night. “We doubt the President will take up the bills currently on the Senate floor to push them forward in order to prevent the fiscal cliff.”

A slim possibility remains that a deal will still be reached by the end of the year, Brenner says.”But beside that slight chance, it is time to face reality,” he adds. “Our view of the markets is that the initial down trade will wear off and the markets will bounce, but for now it does not look good.”

A potentially sharply lower open on Friday would combat the steady move higher stocks have achieved recently. The S&P 500 has risen in three of the last four days, is up 15% for the year and remains less than 2% away from the 2012 highs that were achieved in mid-September.

The idea that Washington could tumble over the cliff — a prospect that could push the economy into a recession early next year – had largely been brushed off by investors in recent days as a worst-case scenario and one that was unlikely to unfold.

In fact, investors lately had actually been feeling pretty chipper about the market’s short-term prospects.

Bullish sentiment among individual investors rang in at the second-highest level of the year, according to the most recent American Association of Individual Investors’ weekly investor survey, released Thursday morning prior to the most recent fiscal-cliff developments.

But even as stocks rallied, many investors cautioned that the wrangling in Washington would eventually have a detrimental impact on markets.

That time may be now.

Dan Greenhaus, chief global strategist at BTIG, said he foresees a scenario in which the S&P 500 could decline 15% from current levels — similar to what transpired in the summer of 2011 during the debt-ceiling debacle — if the stalemate continues.

“We have been less sanguine than others in the face of December’s rally,” he says, as the S&P 500 is up 1.9% this month. “If we’re going off the cliff, even for a short period, then those gains will not last long.”

Morning MarketBeat Daily Factoid: On this day — Dec. 21, 2012 – the world came to an end. Or it didn’t, depending on whether you’re reading this right now.

Among the companies whose shares are expected to see active trade in Friday’s session are Walgreen and Quanex Building Products.

Walgreen is projected to report first-quarter earnings of 70 cents a share, according to a consensus survey by FactSet.

“Our recent management visit offered further confirmation that comparisons will get increasingly favorable for Walgreen throughout fiscal year 2013,” analysts at Cantor Fitzgerald said in a report.

“We look for WAG/ESRX customer re-activation and contribution from Alliance Boots to be especially significant beginning in 2Q. With two full months of the new WAG/ESRX agreement in place, we believe that the November monthly sales showed further improvement in script volumes and customer traffic following a disappointing sales performance in both September and October.”

Quanex Building Products is likely to post fourth-quarter earnings of 20 cents a share.

“The takeover deal for NYSE Euronext could put a former race-car driver behind the wheel of the Big Board. The play by Atlanta-based IntercontinentalExchange Inc., a commodities-market operator that is far less known than the New York Stock Exchange, was masterminded by ICE founder and Chief Executive Jeffrey Sprecher, an executive known for his down-to-earth Midwestern demeanor and sharp elbows when it comes to business and deal making.”

“Over the past five years, Duncan Niederauer has been the face of a fractured and besieged industry. Chief executive of NYSE Euronext, he has appeared on television, often from the floor of the New York Stock Exchange, in the aftermath of events like the 2010 “flash crash” and the botched public offerings of Facebook Inc. and BATS Global Markets Inc. this year.”

“Prepare for a new ICE age. After failing to buy NYSE Euronext for $11.3 billion in a joint bid with Nasdaq OMX last year, IntercontinentalExchange, or ICE, is trying again for $8.2 billion. And despite bidding $3 billion less for the owner of the New York Stock Exchange and London’s Liffe futures exchange, this time ICE should succeed.”

“A long line of America’s top chief executives have rotated through Washington in recent weeks, loudly urging lawmakers and the White House to reach a broad deal to fix the budget. They once sounded optimistic. Now many of them aren’t talking, and if they are, they’re gloomy.”

“A federal judge sentenced Peter Madoff to 10 years in prison for his actions as the top compliance officer at his older brother’s investment firm Thursday, making him only the second person sent to prison after four years of investigations into the multi-billion dollar fraud.”

“Research In Motion Ltd. posted a small net gain in its fiscal third quarter, swinging back to profitability but falling short of resolving some of the biggest challenges facing the BlackBerry maker as it gears up to introduce its new line of smartphones next month.”

“UBS AG’s interest-rate-rigging settlement this week is shining a spotlight on the arcane world of London’s interdealer brokers, who appear to have played a key role coordinating banks’ efforts to manipulate the London interbank offered rate, or Libor.”

“There are two reasons the Federal Reserve might raise interest rates sooner than it anticipates. The first is that inflation picks up by more than it has forecast. The second is that the unemployment rate falls more quickly than it thinks it will. The latter is the more likely.”

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